Silverstar 10Q 2007 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2006

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to ______________

Commission File Number 0-27494

SILVERSTAR HOLDINGS, LTD. (Exact name of Registrant as Specified in Its Charter)

Bermuda	Not Applicable
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

Clarendon House, Church Street, Hamilton HM CX, Bermuda (Address of Principal Executive Offices with Zip Code)

Registrant’s Telephone Number, Including Area Code: 809-295-1422

_____________________________________________________________________ Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Check one: Large accelerated filer | | Accelerated filer | | Non-accelerated filer |X|

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes | | No |X|

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |_| No |_|

APPLICABLE ONLY TO CORPORATE ISSUERS:

Title of Class	Shares Outstanding on February 9, 2007
Class A Common Stock	9,352,577
Class B Common Stock	814,786
Total	10,167,363

PART I - FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Consolidated Balance Sheets at December 31, 2006 (Unaudited) and June 30, 2006

	Condensed Consolidated Statements of Operations (Unaudited) for the three months ended December 31, 2006 and 2005

	Condensed Consolidated Statements of Operations (Unaudited) for the six months ended December 31, 2006 and 2005

	Condensed Consolidated Statements of Cash Flows (Unaudited) for six months ended December 31, 2006 and 2005

	Notes to the Condensed Consolidated Financial Statements (Unaudited)

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3	Quantitative and Qualitative Disclosures About Market Risk

Item 4	Controls and Procedures

PART II - OTHER INFORMATION

Item 1	Legal Proceedings

Item 1A	Risk Factors

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.	Defaults upon Senior Securities

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information

Item 6	Exhibits

	SIGNATURES

SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	December 31,			June 30,
ASSETS	2006			2006
Current Assets:
Cash and cash equivalents, includes restricted cash of
$735,209 and $647,797 respectively	$	3,456,757		$	9,075.259
Cash restricted for foreign tax estimated liability		3,022,734			2,933,342
Accounts receivable, net		2,808,955			637,135
Inventory		926,564			58,732
Current portion of long-term notes receivable		191,580			164,548
Prepaid expenses and other current assets		517,082			292,805
Total current assets		10,923,672			13,161,821
Property, plant and equipment, net		928,282			77,985
Investments in non-marketable securities		1,143,566			1,143,566
Long-term notes receivable		363,426			458,670
Goodwill, net		808,314			841,726
Intangible assets, net		32,044,788			1,412,854
Deferred tax asset		611,239			-
Deferred charges and other assets		490,716			441,367
Total assets	$	47,314,003		$	17,537,989
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Line of credit		2,908,531			647,797
Current portion of long-term debt		59,834			180,323
Notes payable - acquisition		5,248,151			-
Current portion of convertible secured debentures		2,743,632			900,000
Accounts payable		4,180,637			304,088
Accrued Royalty expense		2,329,384			82,643
Accrued Payroll taxes		1,427,228			49,846
Accrued expenses		2,365,883			822,463
Estimated liability for foreign tax		618,285			600,000
Total current liabilities		21,881,565			3,587,160
Long-term debt
Convertible secured debentures		1,952,084			2,318,455
Contingent liability - Empire earn out		12,102,434			-
Obligation to issue common stock		256,892			231,892
Total liabilities	$	36,192,975		$	6,137,507
Commitments, contingencies and other matters
Stockholders’ equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued and outstanding
Common stock, Class A, $0.01 par value, 50,000,000 shares authorized; 9,189,154
and 8,313,774 shares issued and outstanding, respectively		91,892			83,138
Common stock, Class B, $0.01 par value; 2,000,000 shares authorized;
835,260 share issued and outstanding		8,353			8,353
Common stock, FSAH Class B $0.001 par value; 10,000,000 shares authorized;
2,671,087 shares issued and outstanding		600			600
Additional paid-in capital		67,193,297			65,573,387
Accumulated deficit		(56,633,467	)		(54,390.357	)
Accumulated comprehensive income		460,353			125,361
Total stockholders’ equity		11,121,028			11,400,482
Total liabilities and stockholders’ equity	$	47,314,003		$	17,537,989

SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended December 31,
	2006			2005
Net Revenues	$	2,960,789		$	983,434
Operating expenses:
Cost of sales		1,252,001			147,664
Development costs and royalties		987,675			325,878
Selling, general and administrative		1,451,216			727,982
Amortization of intangibles		630,827			34,784
Depreciation		24,948			8,220
		4,346,668			1,244,528
Operating loss		(1,385,878	)		(261,094	)
Other income (expense)		(20	)		17,468
Foreign currency gain (loss)		357,428			(15,697	)
Acquisition costs incurred		-			(209,342	)
Amortization of convertible debt discounts and issuance costs		(171,425	)		(123,169	)
Interest expense		(257,896	)		(87,701	)
Interest income		159,480			105,179
Loss from continuing operations before income taxes		(1,298,311	)		(574,356	)
Provision for income taxes		3,360			-
Loss from continuing operations		(1,301,671	)		(574,356	)
Discontinued operations:
Income from operations net of Income taxes of $0 and $0, respectively		_________			119,393
Net loss		($1,301,671	)		($454,963	)
Income (loss) per share:
Basic
Continuing operations		($.14	)		($0.06	)
Discontinued operations		-		$	.01
Net loss		($.14	)		($0.05	)
Diluted
Continuing operations		($.14	)		($0.06	)
Discontinued operations		-			.01
Net loss		($.14	)		($0.05	)
Basic		9,431,657			9,076,518
Diluted		9,431,657			9,548,425

SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Six Months Ended December 31,
	2006			2005
Net Revenues	$	3,239,534		$	1,354,143
Operating Expenses:
Cost of sales		1,371,570			192,733
Development costs and royalties		1,055,716			442,863
Selling, general and administrative		2,065,171			1,315,326
Amortization of intangibles		673,188			68,702
Depreciation		32,678			16,227
		5,198,323			2,035,851
Operating loss		(1,958,789	)		(681,708	)
Other income (loss)		(9	)		41,338
Foreign currency gains		95,355			17,540
Acquisition costs incurred		-			(209,342	)
Amortization of convertible debt discounts and issuance costs		(330,532	)		(123,169	)
Interest expense		(360,722	)		(94,836	)
Interest income		314,948			189,293
Loss from continuing operations before income taxes		(2,239,749	)		(860,884	)
Provision for income taxes		(3,360	)		-
Loss from continuing operations		(2,243,109	)		(860,884	)
Discontinued operations:
Income from operations net of Income taxes of $0 and $0, respectively		-			357,623
Net loss		($2,243,109	)		($503,261	)
Income (Loss) per share:
Basic
Continuing operations		($0.24	)		($0.10	)
Discontinued operations	$	-		$	.04
Net loss		($0.24	)		($0.06	)
Diluted
Continuing operations		($0.24	)		($0.09	)
Discontinued operations	$	-		$	.04
Net loss		($0.24	)		($0.06	)
Basic		9,290,346			9,072,551
Diluted		9,290,346			9,586,842

SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(UNAUDITED)

	Six Months Ended December 31,
	2006			2005
Cash flows from operating activities:
Net (loss) from operations	$	(2,243,109	)	$	(503,261	)
Depreciation and amortization		1,036,398			208,097
Loss on disposal of fixed assets		10,195
Stock-based compensation		77,585			34,188
Stock issued for services		58,740
Unrealized foreign currency gains		(113,913	)		(71,657	)
Accrued interest income on notes receivable		(14,453	)		(120,031	)
Changes in operating assets and liabilities, net		1,609,063			(399,287	)
Increase in other assets		(10,932	)
Increase in other liabilities		25,000
Net changes in assets and liabilities of discontinued operations		-			(628,028	)
Net cash provided by( used in) operating activities		434,574			(1,479,979	)
Cash flows from Investing activities:
Acquisition expenses capitalized		-			(3,322	)
Cost paid for acquisition of Empire Interactive		(8,072,070	)
Proceeds from sale of fixed assets		11,008
Purchase of fixed assets		(3,971	)		(1,896	)
Proceeds from repayment of long-term note receivable		99,281			48,164
Net cash provided by (used) in investing activities		(7,965,752	)		42,946
Cash flows from financing activities:
Short term borrowings (repayments), net		(258,502	)		628,412
Increase in deposits held in escrow		-			(1,184,450	)
Increase in bank overdraft		-			65,865
Net proceeds from convertible debenture		1,129,714			4,373,301
Repayment of long term debt		-			(89,303	)
Proceeds from private placement sales of common stock		650,000			-
Proceeds from the exercise of stock options		56,472			22,500
Net cash provided by discontinued operations		-			277,864
Net cash provided by financing activities		1,577,684			4,094,189
Effect of exchange rates on cash		334,992			66,289
Net increase (decrease) in cash and cash equivalents		(5,618,502	)		2,723,445
Cash and cash equivalents, beginning of period		9,075,259			4,865,291
Cash and cash equivalents, end of period	$	3,456,757		$	7,588,736
Supplemental cash flow information:
Cash paid for interest	$	296,404		$	50,815

See notes to condensed consolidated financial statements.

SILVERSTAR HOLDINGS, LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 1. FINANCIAL INFORMATION

The Company is a holding company that seeks to acquire businesses fitting a predefined investment strategy. The Company is the parent company of Empire Interactive PLC (“Empire”), a leading worldwide publisher of interactive entertainment software for all game platforms, as well as Strategy First Inc. (“Strategy First”), a leading worldwide publisher of entertainment software for the Personal Computer (PC). The Company is also a minority shareholder in Magnolia Broadband Wireless, a development stage company which is developing mobile wireless broadband products.

NOTE 2. LIQUIDITY CONSIDERATIONS

We currently do not have sufficient cash on hand to meet our short and long term obligations. While in the past, the Company has succeeded in meeting its cash flow requirements through the raising of additional debt or equity, the sale of assets or through operating cash flow, there is no guarantee that it may be successful in doing so going forward. The Company’s failure to do so will raise substantial doubt as to its ability to continue as a going concern. Management’s plans to alleviate this uncertainty are as follows:

·	raise additional capital through the sale of equity or additional debt. To this end management has received various indications of interest from investors to raise additional capital either through subordinated debt, preferred stock or a placement of common stock.

generate significant short term operating earnings and cash flow primarily through its newly acquired subsidiary Empire Interactive. PLC. Empire currently has substantially completed the first Next Generation version of its best selling Flat Out franchise. The company anticipates that the launch of this game, along with Empire’s ongoing business will generate operating profits and cash flow in the short term.

·	The Company has approximately $2.6 million restricted cash in South Africa set aside to match its current South African tax assessment. The Company is vigorously seeking to set this assessment aside and if it does so these resources will be available for general corporate purposes.

·	In the event the Company is unsuccessful in any of the above measure, it may seek to renegotiate some of the terms of its larger short term liabilities, primarily related to the acquisition of Empire Interactive and its outstanding convertible debentures

Management believes that the actions that will be taken by the Company provide the opportunity for the Company to improve liquidity and achieve profitability. However there can be no assurance that such events will occur.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 3. BASIS OF PREPARATION

The unaudited consolidated financial statements include the accounts of the Company and all of its subsidiaries in which it has a majority voting interest. Investments in affiliates are accounted for under the equity or cost method of accounting. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.

Pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q, the financial statements, footnote disclosures and other information normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed. The financial statements contained in this report are unaudited but, in the opinion of the Company, reflect all adjustments, consisting of only normal recurring adjustments necessary to fairly present the financial position as of December 31, 2006 and the results of operations and cash flows for the interim periods of the fiscal year ending June 30, 2007 ("fiscal 2007") and the fiscal year ended June 30, 2006 ("fiscal 2006") presented herein. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements, footnote disclosures and other information should be read in conjunction with the financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2006.

Net Income or Loss Per Share

Basic net income or loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding and dilutive potential common shares reflecting the dilutive effect of stock options, warrants, convertible debentures and shares to be issued in connection with prior acquisitions. Dilutive potential common shares, stock options, warrants and convertible debentures for all periods presented are computed utilizing the treasury stock method. The dilutive effect of shares to be issued in connection with the obligations related to prior acquisitions is computed using the average market price for the quarter.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and all highly liquid investments with original maturities of three months or less. The vast majority of our cash balances are held in liquid accounts at two highly rated financial institutions. While these deposits are not insured, the quality of such financial institutions is such that the risks of loss on these funds are minimal. Restricted cash balances at December 31, 2006 totaled $735,209, which is used as collateral on the Company’s line of credit.

Reclassifications

Royalty expenses for the three and six months ending December 31, 2005 totaling $325,878 and $442,683 have been reclassified from cost of sales to development costs and royalties to conform to the fiscal 2007 presentation.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” This standard replaced SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” The standard requires companies to recognize all share-based payments to employees, including grants of employee stock options, in the financial statements based on their fair values on the grant date and is effective for annual periods beginning after June 15, 2005. In accordance with the revised statement, the Company recognizes the expenses attributable to stock options granted or vested subsequent to July 1, 2005. During the six month periods ending December 31, 2006 and December 31, 2005 the Company recognized expenses of $77,585 and $17,094, respectively, for employee stock options that vested during fiscal years 2007 and 2006. Based on existing unvested option agreements the Company anticipates an additional expense of approximately $74,070 in fiscal 2007 which could increase if additional options are granted during the fiscal year. As of December 31, 2006, $178,344 of total unrecognized compensation costs related to non-vested options is scheduled to be recognized over a weighted average period of 1.72 years.

The weighted average grant date fair value of options granted during the six months ended December 31, 2006 and the significant assumptions used in determining the underlying fair value of each option grant on the date of the grant utilizing the Black Scholes option pricing model are noted in the following table. Expected volatility is based on historical volatility data of the Company’s stock. The expected term of stock options granted is based on historical data and represents the period of time that stock options are expected to be outstanding. The risk-free rate of the stock options is based on the United States Treasury rate in effect at the time of grant. For the six months ended December 31, 2005, the Company did not grant stock options.

	2006
Weighted average grant-date fair value of options granted	$	1.04
Assumptions:
Risk free interest rate		4.65-4.71	%
Expected life		2-4 years
Expected volatility		48-95	%
Expected dividend yield		0.00	%

As of December 31, 2006, the Company had 1,297,405 stock options outstanding, of which 1,138,635 are fully vested. A summary of the activity in the Company’s stock option plans is as follows for the six months ended December 31, 2006:

	Share Subject Options Outstanding	Weighted Average Exercise

Outstanding, beginning of year	1,287,405	2.17
Granted	170,000	1.85
Forfeited	(95,000)	.74
Exercised	65,000	.87
Outstanding December 31, 2006	1,297,405	2.29

NOTE 4. INTANGIBLE ASSETS

The following table presents details of the purchase of finite-life intangibles as part of the acquisitions of Strategy First and Empire Interactive.

	Estimated		Gross Carrying		Accumulated
	Useful Life		Amount		Amortization			Total
Covenant not to compete		3 years	$	42,867		($23,813	)	$	19,054
Game titles - Empire Interactive		5 years	$	31,357,466		(588,025	)	$	30,769,441
Game titles - Strategy First		10 years	$	1,485,374		(229,081	)	$	1,256,293
Balance on December 31, 2006			$	32,885,707	$	(840,919	)	$	32,044,788

		Estimated		Gross Carrying		Accumulated
		Useful Life		Amount		Amortization			Total
Covenant not to compete		3 years	$	44,638		($17,356	)	$	27,282
Game titles - Strategy First		10 years		1,546,773		(161,201	)		1,385,572
Balance on June 30, 2006			$	1,591,411	$	(178,557	)	$	1,412,854

Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually.

The Covenant not to compete and the Game titles acquired as part of the acquisition of Strategy First are both amortized using the straight-line method. The Game titles of Empire are amortized over a five-year period based on weighted average expected sales from the date the title is launched. For titles that have not yet been launched as of December 31, 2006 a launch date was estimated to project future amortization

Amortization expense for intangible assets for the six months periods ended December 31, 2006 and 2005 were $673,188 and $68,702 respectively. Estimated amortization expense for the rest of fiscal 2007 and for the succeeding five fiscal years is as follows:


2007	$	4,006,928
2008		10,078,834
2009		7,430,481
2010		6,069,414
2011		2,273,383
2012		1,160,930
Thereafter		1,024,818
	$	32,044,788

NOTE 5. ACQUISITIONS

The offer provided for either a cash payment of approximately $.13 per share (£.07 p), or an earn-out alternative, where the initial payment was approximately $.09 per share (£.049 p), with a further $.094 per share (£.05 p) in loan notes payable in October 2007. Additionally, there is an earn-out payable in April 2008. The earn-out is based on a formula of Empire’s EBITDA for the fiscal year ended June 30, 2007. The acquisition was recorded assuming the earn out targets will be fully achieved and the Company’s December 31, 2006 Balance Sheet includes a liability of £6,177,548 p, or $12,102,434 USD based on the December 31, 2006 foreign exchange rate of 1.959 US dollar to the British pound.

The aggregate purchase price for Empire’s stock, assuming the full earn out threshold is met, will be approximately $26.1 million or £13.4 million based on the December 1, 2006 foreign exchange rate of 1.9508 US dollar to the UK pound of which amount approximately $5.2 million are loan notes which mature October 31, 2007, and $12.1 million are loan notes payable in April 2008 if earnings targets are achieved. $.7 million of the acquisition expenses were paid by the issuance of 406,180 shares of Silverstar’s Class A common stock. Of this amount 350,000 shares were issued to a consultant to the Company as a finder’s fee for the transaction pursuant to his consulting contract. The consultant was subsequently appointed Chairman of the Board of Empire Interactive PLC. Of the remaining $8.1 million of the purchase price approximately $7.6 million has been paid by utilizing the Company’s internal cash resources. The remaining $.5 million has been accrued as a short-term liability.

The purchase price was allocated on the basis of the estimated fair values of the assets acquired and liabilities assumed. The acquisition was accounted for as a purchase. The intangible assets identified in connection with the acquisition were recorded and are being amortized in accordance with the provisions of SFAS No. 141 and 142.

Purchase price:

Net assets acquired:
Current assets	$	3,226,230
Fixed assets		898,804
Intangible assets		31,224,616
Other assets		608,650
Total assets		35,958,300
Total liabilities		(9,856,885	)
	$	26,101,415

The following unaudited proforma summary presents consolidated financial information as if the acquisition of Empire Interactive had occurred effective July 1, 2006 and 2005 respectively. The proforma information does not necessarily reflect the actual results that would have occurred, nor is it necessarily indicative of future results of operations of the consolidated entities.

Six Months Ended Dec 31,2006

	Silverstar			Empire			Proforma

Net Revenues	$	1,198,844		$	12,475,102		$	13,673,946
Operating Expenses:
Cost of sales		403,322			3,331,229			3,734,551
Development costs and royalties		184,005			4,366,175			4,550,180
Selling, general and administrative		1,369,322			3,830,537			5,199,859
Amortization of intangibles		84,061			3,229,476			3,313,537
Depreciation		15,315			108,106			123,421
		2,056,025			14,865,523			16,921,548
Operating loss		(857,181	)		(2,390,421	)		(3,247,602	)
Other expense		(9	)		(311,317	)		(311,326	)
Foreign currency loss		(37,154	)		(34,061	)		(3,093	)

Amortization of convertible debt discounts and issuance Costs		(330,532	)		-			(330,532	)
Interest expense		(235,174	)		(155,543	)		(390,717	)
Interest income		313,452			1,496			314,948
Loss from continuing operations before income taxes		(1,146,598	)		(2,821,724	)		(3,968,322	)
Income tax expense		-			26,669			26,669
Net loss		(1,146,598	)		(2,848,393	)		(3,994,991	)

Loss per share							$	(.42	)
Basic and diluted:

Six Months Ended Dec 31,2005
	Silverstar			Empire			Proforma

Net Revenues	$	1,354,143		$	12,896,061		$	14,250,004
Operating Expenses:
Cost of sales		192,733			4,443,858			4,636,591
Development costs and royalties		442,863			5,007,823			5,450,686
Selling, general and administrative		1,315,326			4,417,749			5,733,075
Amortization of intangibles		68,702			5,321,293			5,389,995
Depreciation		16,227						16,227
		2,035,851			19,190,723			21,226,574
Operating loss		(681,708	)		(6,294,662	)		(6,796,370	)
Other income		41,338						41,338
Foreign currency loss		17,540						17,540
Acquisition costs incurred		(209,342	)					(209,342	)
Amortization of convertible debt discounts and issuance Costs		(123,169	)					(123,169	)
Interest expense		(94,836	)		(85,343	)		(180,179	)
Interest income		189,293						189,293
Loss from continuing operations, net of income taxes of $0		(860,884	)		(6,380,005			(7,240,889	)
Discontinued operations: Income from operations, net of income taxes of $0		357,623						357,623
Net loss		(503,261	)		(6,380,005	)		(6,883,266	)
Income (loss) per share
Basic
Continuing operations							$	(.77	)
Discontinued operations								04
Net loss							$	0.73

Diluted
Continuing operations							$	(.74	)
Discontinued operations								.04
Net loss							$	0.69

NOTE 6. DISCONTINUED OPERATIONS

On April 7, 2006, the Company sold all the assets and certain liabilities of Fantasy Sports, Inc. (“Fantasy Sports”) to FUN Technologies, LLC for approximately $4.4 million, including $3.85 million paid in cash at closing. The gain on disposal of this business segment was reported during the quarter ended June 30, 2006.

In accordance with accounting principles generally accepted in the United States of America, the net income related to Fantasy Sports has been included in discontinued operations in the company's consolidated statements of operations.

The following summarizes the operating results of the discontinued operations.

	Three Months Ended December 31,					Six Months Ended December 31,
	2006		2005			2006		2005
Revenue	$	-	$	553,380	Revenue	$	-	$	1,149,108
Net income	$	-	$	119,393	Net Income	$	-	$	357,623

NOTE 7. CASH FLOWS

Changes in operating assets and liabilities consist of the following:

	Six Months Ended December 31,
	2006			2005

Increase (decrease) in accounts receivable	111,813			($654,418	)
Increase (decrease) in inventories	12,483			(52,251	)
Increase in prepaid expenses and current assets	(149,128	)		(219,311	)
Increase in accounts payable	43,151			92,173
Increase (decrease) in accrued expenses	990,744			(51,490	)
Increase (decrease) in deferred revenue	-			486,010
	($1,609,063	)		($399,287	)
Cash flows from operating activities - discontinued operations:
Changes in net assets and liabilities of discontinued operations
Depreciation and amortization	-		$	( 3,856	)
Changes in operating accounts	-			598,958
Changes in cash (included in) from net assets and from discontinued operations	-			32,926
Changes in net assets and liabilities of discontinued operations	-		$	628,028
Cash flows from financing activities - discontinued operations:
Short-term borrowings (repayments), net	-		$	277,864

Non-cash investing and financing activities were as follows:

Issuance of stock as payment for acquisition expenditures	$	723,000	-
Issuance of Notes payable to former Empire shareholders	$	5,208,502	-
Issuance of Notes payable to former Empire shareholders
contingent on earn out targets being achieved	$	12,051,061	-

NOTE 8. BUSINESS SEGMENTS

As a result of the sale of all the assets and certain liabilities of Fantasy Sports on April 7, 2006 the Company no longer operates in the internet fantasy sports games segment and now only operates in one segment -- interactive entertainment software. The operations of Fantasy Sports which fully comprised the Company’s operations in the internet fantasy sports games segment have been reported as discontinued operations for the periods ended December 31, 2005.

The operations of the interactive entertainment software segment are focused on the development and publishing of software games for all game platforms The interactive entertainment software segment is composed of the operations of Empire Interactive and Strategy First. Empire Interactive is a leading publisher of interactive entertainment software that is headquartered in the United Kingdom with offices in the United States, Germany, France and Spain. The company develops and publishes a varied range of titles for all current game platforms in North America, Europe and Asia.

Strategy First is headquartered in Montreal Canada and is a worldwide publisher of strategy based interactive entertainment software for the PC.

NOTE 9. DEBT

Line of Credit

In June 2002, the Company obtained a secured line of credit facility for borrowings up to $1.0 million, which is fully secured by cash balances held in the Company's account. This liability is due on demand and has a floating interest rate that is based on the prime rate minus 1.75%. On December 31, 2006, the prime rate was 8.25%. The balance outstanding under this line of credit at December 31, 2006, and June 30, 2006 was $735,209 and $647,797 respectively.

Empire Interactive has an expired line of credit secured by its receivables, inventory, real property and intangible assets. As of December 31, 2006 the amount outstanding under this facility was £1,109,347 ($2,173,322). The line of credit accrues interest at an annual rate of 7.25%. The facility expired on December 31, 2006 and its renewal is currently being negotiated

Other Debt

Other debt consists of a term loan assumed pursuant to the plan of arrangement related to the Company’s acquisition of Strategy First, payable in monthly principal installments of $22,000 Canadian plus interest at an annual rate of the National Bank of Canada’s prime rate plus 3.25%. The Bank’s prime rate on December 31, 2006 was 6%. The loan matures in April 2007. The balance outstanding as of December 31, 2006 was $59,834.

NOTE 10. CONVERTIBLE SECURED DEBENTURE

On October 31, 2005, the Company consummated a transaction pursuant to a Securities Purchase Agreement, dated October 21, 2005 (the “Purchase Agreement”), with DKR SoundShore Oasis Holding Fund Ltd. (the “Purchaser”).Pursuant to the Purchase Agreement, the Company issued to the Purchaser a $5,000,000 principal amount Variable Rate Secured Convertible Debenture due October 31, 2008 (the “Debenture”) and a warrant to purchase 791,139 shares of the Company’s Common Stock at an exercise price of $1.896 per share (the “Warrant”).

Interest accrues on the principal balance of the note at an annual interest rate equal to prime plus 1.5%. On December 31, 2006 the interest rate was 9.75%. The note is convertible into common stock of the Company at an initial conversion rate of $1.738 per share up to a maximum of 2,876,860 shares. The agreement allows for an additional 1,100,403 shares to be issued upon the conversion of the debentures or exercise of the warrants as a result of either conversion price adjustments or exercise price adjustments. Based upon the closing price per share of the Company’s Common Stock on the date of issuance, there was an intrinsic value associated with the beneficial conversion feature of $124,443, which is presented as a discount on the convertible note and amortized over the term of the note.

The principal amount of the Debenture was to be redeemed at the rate of $185,185 per month, plus accrued and unpaid interest, commencing on July 6, 2006 and may be paid, at the Company’s option (i) in cash or (ii) in shares of the Company’s Common Stock in an amount not to exceed 10% of the total dollar trading volume of the Common Stock during the 10 trading days immediately prior to the applicable monthly redemption date based on a conversion price equal to 85% of the average of the lowest three trading days based upon the volume weighted average price during the 10 trading days immediately prior to the applicable monthly redemption date. In June 2006, the terms of the debenture were amended to require redemption at the rate of $180,000 per month commencing on February 1, 2007. The Company has the option, at any time, to redeem some or all of the outstanding Debenture, in cash, in an amount equal to the sum of (i) 115% of the principal amount of the Debenture outstanding, plus accrued and unpaid interest and liquidated damages (the “Optional Redemption Amount”). However, the Company may pay up to 15% of the principal amount comprising of a portion of the Optional Redemption Amount in shares of the Company’s Common Stock if certain conditions are satisfied. In May 2006, the Company repaid $1,400,000 of the outstanding principal balance along with an early payment penalty of approximately $210,000.

The Company’s obligations under the Debenture are secured by a lien on all assets of the Company in favor of the Purchaser pursuant to a Security Agreement, dated October 31, 2005, among the Company, all of the subsidiaries of the Company and the Purchaser, and guaranteed by all the subsidiaries of the Company pursuant to a Subsidiary Guarantee, dated October 31, 2005, made by the Company’s subsidiaries in favor of the Purchaser. In addition, the obligations of the Company under the Debenture are personally guaranteed by Mr. George Karfunkel pursuant to a Personal Guarantee, dated October 31, 2005, between Mr. Karfunkel and the Purchaser. Mr. Karfunkel is compensated in the amount of 5% of the current principal outstanding per annum.

In connection with the convertible note, the Company issued to the holder of the note a five-year warrant to purchase up to 791,139 shares of the Company’s common stock at an exercise price of $1.896 per share. The fair value for these warrants was estimated at the grant date using the Black-Scholes option pricing model using the following weighted average assumptions: risk-free interest rate of 4.50%, dividend yields of 0% and a volatility factor of the expected market price of the Common Stock of 114.80%. Based upon the closing price per share of the Company’s common stock on the date of issuance, the Company estimated the fair value of the warrant and allocated $665,295 of the proceeds from the note to the warrant, which is presented as a discount on the convertible note, net of amortization to be taken over the three-year term of the note using the effective interest method.

On October 19, 2006, the Company entered into a Securities Purchase Agreement with DKR SoundShore Oasis Holding Fund Ltd., pursuant to which the Company issued to the Purchaser a Variable Rate Secured Convertible Debenture in the principal amount of $1,400,000 due October 31, 2008. The Company and Purchaser are parties to a prior Securities Purchase Agreement, dated October 21, 2005.

The Debenture is convertible at any time after December 19, 2006, at the option of the Purchaser, into shares of Common Stock at a conversion price of $1.738 per share. As of December 31, 2006 no debentures have been converted. Based upon the closing price per share of the Company’s Common Stock on the date of issuance, there was an intrinsic value associated with the beneficial conversion feature of $52,378 which is presented as a discount on the convertible note and amortized over the term of the note.

The Company may prepay any portion of the principal amount of the Debenture prior to December 19, 2006 without the prior written consent of the Purchaser for 100% of the principal amount being prepaid plus any accrued but unpaid interest thereon. As of December 31, 2006, no payments have been made.

The Company shall pay monthly interest on the outstanding principal amount of the Debenture at a rate per annum equal to the prime rate for the applicable interest period plus 1.5%. The interest rate for any interest period shall be decreased by 2% to the extent that the volume weighted average trading price of the Common Stock for five (5) consecutive trading days immediately prior to such interest period (the "Trigger Price") exceeds the conversion price by 25% (and shall be decreased by an additional 2% for every successive 25% that the Trigger Price exceeds the then applicable conversion price but in no event shall the interest rate be less than 0%). All overdue accrued and unpaid interest to be paid under the Debenture shall entail a late fee at a rate of 18% per annum.

The principal amount of the Debenture is redeemable at the rate of $63,636 per month, plus accrued but unpaid interest and liquidated damages, commencing on March 1, 2007. The Company has the option, at any time after December 19, 2006, to redeem some or all of the then outstanding Debenture, in cash, in an amount equal to the sum of (i) 115% of the principal amount of the Debenture then outstanding, (ii) accrued but unpaid interest and (iii) all liquidated damages and other amounts due in respect of the Debenture (the "Optional Redemption Amount") (provided, however, the Company may pay up to 15% of the principal amount comprising a portion of the Optional Redemption Amount in shares of Common Stock if certain conditions are satisfied).

The Company also entered into a Registration Rights Agreement with the Purchaser pursuant to which, unless the Debenture is paid in full on or prior to December 19, 2006, the Company agreed to prepare and file with the Securities and Exchange Commission within 90 days of the date of the Agreement, a shelf registration statement for the purpose of registering for the resale of 130% of all the shares of Common Stock issuable upon conversion of the Debenture and cause such registration statement to become effective under the Securities Act of 1933 within 150 days of the date of the Agreement.

If the registration statement is not filed within 90 days after the date of the Agreement or declared effective within the specified time, then the Company shall pay to the Purchaser certain amounts in cash as liquidated damages. The Company has filed a registration statement in this regard and anticipates it becoming effective within the specified time period.

The Company’s obligations under the Agreement, the Debenture and the Registration Rights Agreement are subject to a security interest granted by the Company pursuant to that certain Security Agreement dated October 21, 2005, by and among the Company, all of the subsidiaries of the Company and the Purchaser.

As consideration, the Company reduced the exercise price of the warrants $.10 to $1.7986 per share. The fair value for the reduction in the exercise price of these warrants was estimated at the grant date using the Black-Scholes option pricing model using the following weighted average assumptions: risk-free interest rate of 4.37%, dividend yields of 0% and a volatility factor of the expected market price of the Common Stock of 106.66%. Based upon the closing price per share of the Company’s common stock on the date of issuance, the Company estimated the fair value of the warrant exercise price reduction and allocated $10,490 of the proceeds from the note to the warrant, which is presented as a discount on the convertible note, net of amortization to be taken over the three-year term of the note using the effective interest method.

The balance of the notes as of December 31, 2006 and June 30, 2006, net of unamortized discounts was as follows:

	December 31, 2006			June 30, 2006
Principal amount of notes	$	5,000,000		$	3,600,000
Discounts for beneficial conversion features		(84,127	)		(60,122	)
Discounts for fair value of warrants and options		(220,157	)		(321,423	)
Balance , net of unamortized discounts	$	4,695,716		$	3,218,455
Less current portion		(2,743,632	)		(900,000	)
Long-term portion	$	1,952,084		$	2,318,455

Scheduled maturities of the convertible debentures as of December 31, 2006 and June 30, 2006 were as follows:

	December 31, 2006		June 30, 2006
1 Year or less	$	2,743,632	$	900,000
1-2 Years		2,256,368		2,700,000
Total	$	5,000,000	$	3,600,000

Interest expense related to the notes amounted to $185,854 and $101,500 during the six and three months ending December 31, 2006, respectively.

Amortization of discounts for the beneficial conversion features and warrant resulted in charges to Amortization of Convertible Debt Discounts and Issuance Costs totaling $140,129 during the six months ended December 31, 2006. The Company also incurred loan costs of $897,084 directly related to securing these notes, which included $500,000, ($250,000 annually) paid for a personal guarantee on the outstanding balances. The loan costs are being amortized over the term of the notes while the guarantee fees of $500,000 are being amortized at the rate of $250,000 per year. Amortization expenses of $190,403 are included in Amortization of Convertible Debt Discounts and Issuance Costs during the six months ended December 31, 2006.

Estimated amortization expense related to the warrants, beneficial conversion feature, and costs related to securing these notes for the rest of fiscal 2007 through debt maturities is as follows:

2007	$	334,869
2008		302,163
2009		12,461
Total	$	649,493

NOTE 11. COMMITMENTS, CONTINGENCIES AND LEGAL MATTERS

Legal Matters

In April 2006, our subsidiary, First South African Holdings, received a letter from the South African Revenue Service (“SARS”) challenging certain tax treatment of dividends and operating loss carry forwards for the years 2002 through 2004. Subsequently SARS issued a tax assessment for approximately $3.2 million. The Company believes that its South African tax filings are in full compliance with all applicable laws and is vigorously defending its position in this regard. However, until such time as these issues are resolved, the Company will retain an amount of cash equal to the assessment in South Africa to satisfy any potential liability that may arise. The Company has recorded an estimated liability of approximately $618,000 in this regard but may be forced to increase this amount should it receive adverse information as it continues its appeal of the SARS assessment.

In January 2006, we brought an action against JoWood Software Productions AG seeking damages in the amount of approximately $850,000 for expenses incurred in connection with our unsuccessful acquisition of shares of JoWood. The case is being heard in the Vienna Commercial Court in Austria. A judgment is anticipated within the next few months.

In March 2006 an action was brought against Empire Interactive, PLC and Empire Interactive Inc. by a financial advisory firm seeking damages of approximately $700,000 relating to an alleged breach of a business development agreement with Empire Interactive, PLC. On February 13, 2007, the case was settled with Empire agreeing to pay an amount of $230,000 due on April 19, 2007

In June 2006, Empire Interactive, Inc. commenced litigation against Take Two Interactive Inc. (“Take Two”) in regard to the accounting and reporting of sales of various products by Take Two. To this point, Empire has received payments of approximately $1,416,000 from Take Two. Empire believes that there are still significant amounts due from Take Two and continues to pursue its claims in the London commercial courts.

Commitments and Contingencies

During the first quarter of fiscal 2006, the Company entered into agreements with two of Strategy First's game developers to guarantee certain of their royalty payments. The guarantee is limited to $100,000. Royalties owed to these developers as of December 31, 2006 are less than $30,000.

The Company anticipates that Strategy First will pay the royalties due to its developers when earned and does not anticipate having to make any payments under these guarantees.

On March 29, 2006, Strategy First entered into an agreement to acquire certain intellectual property rights for $200,000 in cash and the issuance of options to acquire 100,000 shares of the Company’s common stock at an exercise price of $1.50. The options vest when net sales, as defined in the purchase agreement, exceed $750,000 and expire on December 31, 2008. The agreement also provides for commissions of twenty-five percent of net revenues in the event they exceed $500,000 through December 31, 2008. As of December 31, 2006 net revenues earned under this agreement were approximately $196,000.

NOTE 12. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 requires that in evaluating the effects of prior year errors on current year financial statements, SEC registrants must consider the effect of the errors on both the current year statement of operations and the magnitude of the errors on the current year balance sheet. As a result, SAB 108 could require prior year financial statements to be corrected for errors that had previously been deemed immaterial. SAB 108 is effective for fiscal years ending after November 15, 2006. The Company has not determined the impact that this standard will have on its financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not yet analyzed the effect, if any, this interpretation may have on its financial condition, results of operations, cash flows or disclosures.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure about fair value measurements, and is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of this Statement will have on its consolidated results of operations and financial condition.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140.” This statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, and eliminates a restriction on the passive derivative instruments that a qualifying special-purpose entity (SPE) may hold. The statement is effective for fiscal years beginning after September 15, 2006. The Company does not believe this standard will have a material effect on its financial position or results of operations

In June 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces Accounting Principles Board Opinion (“APB”) No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Among other changes, SFAS No. 154 requires that a voluntary change in accounting principle be applied retroactively with all prior period financial statements presented on the basis of the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived non-financial asset must be accounted for as a change in estimate (prospectively) that was affected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 did not have an effect on the Company’s financial position or results of operations.

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes included therein and our Annual Report on Form 10-K for the year ended June 30, 2006.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations include forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. Actual results could differ materially because of factors discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2006.

Background and History

We were incorporated in September 1995. Our business plan is to actively pursue acquisitions fitting a pre defined investment strategy. Currently our strategy focuses on the following:

•

acquiring controlling stakes in high quality electronic entertainment software businesses with strong management teams that are positioned to use technology and Internet related platforms to fuel above average growth;

•

Investing in companies that show an ability to contribute, in the short to medium term, to earnings per share through operating profit or capital appreciation; and

•

operating in partnership with committed, incentivised, entrepreneurial management who show the vision and ability to grow their businesses into industry or niche leaders.

We sold our last remaining South African operations in November 2000. We still have significant assets that are denominated in South African Rand. The assets include cash and notes receivables. Currently we do not have a financial hedging program to protect against the depreciation of the SA Rand against the US dollar and, therefore, as long as we hold assets in South Africa we will continue to record income statement gains or losses to the extent that the Rand’s value fluctuates relative to the US dollar.

On November 17, 2000, we acquired all of the assets and certain liabilities of Fantasy Sports from GoRacing Interactive Services, Inc. Founded in 1993, Fantasy Sports operates the fantasycup.com, website and specializes in subscription based NASCAR, college football and other fantasy sports games. On April 7, 2006, we disposed of substantially all the assets and liabilities of Fantasy Sports.

On April 21, 2005, we acquired Strategy First Inc. (www.strategyfirst.com), a leading worldwide publisher of entertainment software for the PC. We acquired the company through the jurisdiction of the Montreal bankruptcy court. Pursuant to the approved plan of arrangement, we paid cash consideration to the creditors of Strategy First of $609,000; we issued 377,000 shares of our common stock; warrants to purchase 200,000 shares of our common stock; and assumed approximately $400,000 in existing bank debt, as well as contingent consideration based on the future profitability of Strategy First. Founded in 1990, Strategy First publishes software games primarily for the PC platform. Some of its popular games include O.R.B, the Disciples franchise, Sacred Lands, Kohan: Immortal Sovereigns, Steel Beasts, Galactic Civilizations, and the Jagged Alliance franchise.

On October 31, 2005, we consummated a transaction pursuant to a Securities Purchase Agreement, dated October 21, 2005 (the “Purchase Agreement”), with DKR SoundShore Oasis Holding Fund Ltd. (the “Purchaser”).Pursuant to the Purchase Agreement, we issued to the Purchaser a $5,000,000 principal amount Variable Rate Secured Convertible Debenture due October 31, 2008 (the “Debenture”) and a warrant to purchase 791,139 shares of the our common stock at an exercise price of $1.896 per share (the “Warrant”).

In May 2006, the Company repaid $1,400,000 of the outstanding principal balance along with an early payment penalty of approximately $210,000. On October 19, 2006, the Company entered into a Securities Purchase Agreement with DKR SoundShore Oasis Holding Fund Ltd., pursuant to which the Company issued to the Purchaser a Variable Rate Secured Convertible Debenture in the principal amount of $1,400,000 due October 31, 2008. The Company and Purchaser are parties to a prior Securities Purchase Agreement, dated October 21, 2005.

On December 4, 2006, the Company announced that it had achieved more than 90% acceptance of its offer to acquire the shares of Empire Interactive PLC. Based on these acceptances, the Company announced a formal closing of the officer to Empire shareholders effective December 1, 2006. The Company paid consideration to the shareholders as follows: approximately $6.8 million paid on closing; an additional $5.1 million in loan notes payable October 31, 2007; and further contingent consideration based on Empire’s EBIDTA for the 12 months ended June 30, 2007. Founded in 1989, Empire develops and publishes software games for all game platforms. Some of its popular games include the FlatOut franchise, the Ford Racing franchise, Big Mutha Truckers, Taito Legends, Starsky & Hutch, Starship Troopers, and International Cricket Captain.

Quarter Ended December 31, 2006 As Compared to Quarter Ended December 31, 2005

All financial data in the following discussion and analysis included the results of operations of Empire Interactive PLC for the month of December 2006 only.

Revenues

Net revenues increased to $2,961,000 as compared to $983,000 in the comparable quarter of the previous year. For the period, Empire Interactive’s revenues were $2,041,000 while Strategy First’s revenues were $920,000.

Cost of Sales:

Cost of sales was $1,252,000 in the second fiscal quarter 2007, or 42.2% of total revenues. Cost of sales for Empire Interactive was $968,000 or 47.4% while cost of sales for Strategy First was $284,000 or 30.9%. For the quarter ending December 31, 2005, cost of sales was $148,000 or 15.1%. This increase is primarily the result of lower gross margins for console games, which make up the majority of Empire’s sales, as opposed to PC products. In 2005 a significant portion of Strategy First’s sales were generated through foreign royalty sales which had no associated cost of sales .

Development Costs and Royalties:

Development costs and royalties were $980,000 in the second fiscal quarter 2007, or 33.1% of total revenues. Development Costs and royalties for Empire Interactive totaled $872,000 or 42.7%. Royalty costs for Strategy First were $116,000 or 12.6% as compared to $326,000 or 33.2% during the same period in the prior fiscal year. Strategy First does not expend significant amounts on development while Empire Interactive typically budgets large amounts for annual development. In 2005 a significant portion of Strategy First’s sales were generated through foreign royalty sales, which had no associated royalty costs

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the quarter ended December 31, 2006 were $1,451,000. Selling, general and administrative expenses for Empire Interactive were $696,000 while selling, general and administrative expenses for Strategy First were $473,000. Corporate overhead was $282,000. In the quarter ended December 31, 2005 selling general and administrative expenses were $728,000 of which Strategy First accounted for $478,000 with corporate overhead accounting for $250,000 .

Amortization and Depreciation

Amortization of intangible assets increased to $631,000 in the second quarter of fiscal 2007 as compared to $35,000 in the comparable period last year. This increase is primarily due to the amortization of intangible assets acquired in the Empire Interactive transaction. Depreciation expenses were $25,000 for the second quarter of fiscal 2007 and $8,000 in fiscal 2006. Depreciation expense for Empire Interactive was $17,000

during the quarter ended December 31, 2006.

Foreign Currency Gains (Losses)

Foreign currency gains or losses are primarily related to the financial assets remaining in South Africa. Proforma foreign currency gains during the second quarter of 2007 were $357,000.Gains of $263,000 related to the remaining assets from the sale of discontinued South African operations. Empire realized foreign currency gains of $132,000 Strategy First realized foreign currency losses of $38,000. The foreign currency losses during the second quarter of fiscal 2006 were $16,000. The functional currency of Empire Interactive is the British pound and its products are sold throughout the world. The functional currency of Strategy First is the Canadian dollar and its products are sold throughout North America and Europe. Gains (losses) from discontinued South African operations are the result of fluctuations of the South African Rand against the US dollar.

ACQUISITION COSTS INCURRED

During fiscal year 2006 the Company incurred approximately $209,000 of expenses pursuing the unsuccessful acquisition of JoWood Software Productions AG. These costs consisted primarily of legal and travel expenses. During the six months ended December 31, 2005 the Company expensed these previously capitalized costs when it became apparent that the acquisition would not occur. In January 2006, we brought an action against JoWood Software Productions AG seeking damages in the amount of approximately $850,000 for expenses incurred in connection with our unsuccessful acquisition of shares of JoWood. The case is being heard in the Vienna Commercial Court in Austria. A judgment is anticipated within the next few months.

Amortization of Convertible Debt Discounts and Issuance Costs

Amortization of convertible debt discounts and issuance costs were $171,000 in the second quarter fiscal 2007 as compared to $123,000 in the comparable period last year. In fiscal 2006 we recorded two months amortization as compared to three months in the current period

Interest Income

Interest income of $159,000 was recorded during the three months ended December 31, 2007 as compared to interest income of $105,000 in the prior year. The increase of $54,000 is primarily the result of the Company’s increase in the average cash balances held during the quarter ended December 31, 2006 as compared to December 31, 2005.

Interest Expense

Interest expense of $258,000 was recorded during the second quarter of fiscal 2007 as compared to $88,000 in the same period of the prior year. Empire Interactive incurred interest expenses of $126,000 for the three months ending December 31, 2006.

Provision for Income Taxes

We are registered in Bermuda, where no income tax laws are applicable. Two of our subsidiaries are subject to US income taxes, four subsidiaries are subject to United Kingdom income taxes, one subsidiary is subject to Canadian income taxes and one is subject to South African income taxes. Up to this date, none of them has had taxable income as they have incurred losses for tax purposes. The deferred tax asset generated by the tax losses and temporary differences has been fully reserved with the exception of approximately $611,000 carried as a long-term asset that will be offset against future taxable earnings of Empire interactive in the U.K.

In early April 2006, our subsidiary First South African Holdings received a letter from the South African Revenue Service (“SARS”) challenging certain tax treatment of dividends and operating loss carry forwards for the years 2002 through 2004. Subsequently SARS has issued an assessment for approximately $3.0 million.

We believe that our South African tax filings are in full compliance with all applicable laws and are vigorously defending its position in this regard. However, until such time as these issues are resolved, we will retain cash in an amount approximately equal to the assessment in South Africa to satisfy any potential liability that may arise.

Not withstanding the above and after reviewing this potential liability with outside experts and conducting a further review into the circumstances of the assessment, we have recorded an estimated liability of approximately $618,000 at this time.

We will continue to vigorously defend our position in this matter. However, circumstances may dictate that we increase this liability as we proceed. There is, therefore, no assurance that the $618,000 amount will be sufficient to offset the ultimate tax liability. Conversely, we believe that we have strong defenses in this matter and we may ultimately obtain a ruling that results in a lesser liability. As this is a fluid situation, we will assess our liability in this regard on a quarterly basis and may adjust this liability in the future.

Discontinued Operations

During the second quarter of fiscal 2006, we recognized gains of $119,000 from the discontinued operations of Fantasy Sports, Inc. On April 7, 2006, the Company sold all the assets and certain liabilities of Fantasy Sports, Inc. to FUN Technologies, LLC for approximately $4.4 million, including $3.85 million paid in cash at closing.

Net Loss

We have recognized a net loss of $1,246,000 during the second quarter fiscal 2007 compared to a net loss of $455,000 during the same period in the prior fiscal year primarily as the result of losses incurred in starting to amortize the intangible game assets acquired in the Empire Interactive transaction during the quarter ending December 31, 2006.

Six Months Ended December 31, 2007 As Compared to Six Months Ended December 31, 2006

Quarter Ended December 31, 2006 As Compared to Quarter Ended December 31, 2005

Revenues

Net revenues increased to $3,240,000 as compared to $1,354,000 in the comparable period of the previous year. For the period, Empire Interactive’s revenues were $2,041,000 while Strategy First’s revenues were $1,199,000.

Cost of Sales:

Cost of sales was $1,372,000 in the first six months of fiscal 2007, or 42.3% of total revenues. Cost of sales for Empire Interactive was $968,000 or 47.4% while cost of sales Strategy First was $404,000 or 36.1%. For the six months ending December 31, 2005, cost of sales was $193,000 or 14.2%. This increase is primarily the result of lower gross margins for console games, which make up the majority of Empire’s sales, as opposed to PC products. In 2005 a significant portion of Strategy First’s sales were generated through foreign royalty sales, which had no associated cost of sales.

Development Costs and Royalties:

Development costs and royalties were $1,056,000 in the first two quarters of fiscal 2007, or 33.1% of total revenues. Development Costs and royalties for Empire Interactive totaled $872,000 or 42.7%. Royalty costs for Strategy First were 184,000 or 15.3% as compared to 443,000 or 36.9% during the same period in the prior fiscal year. Strategy First does not expend significant amounts on development while Empire Interactive typically budgets large amounts for annual development. In 2005 a significant portion of Strategy First’s sales were generated through foreign royalty sales, which had no associated royalty costs

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the six months ended December 31, 2006 were $2,065,000. Selling, general and administrative expenses for Empire Interactive were $696,000 while selling, general and administrative expenses for Strategy First were $845,000. Corporate overhead was $524,000. For the six months ended December 31, 2005 selling general and administrative expenses were $1,315,000 of which Strategy First accounted for $705,000 with corporate overhead accounting for $610,000. .

Amortization and Depreciation

Amortization of intangible assets increased to $673,000 during the first six months of fiscal 2007 as compared to $68,000 in the comparable period last year. This increase is primarily due to the amortization of intangible assets acquired in the Empire Interactive transaction. Depreciation expenses were $33,000 for the six months ending December 31, 2006 and $16,000 in fiscal 2006. Depreciation expense for Empire Interactive was $17,000 during the six months ended December 31, 2006.

Foreign Currency Gains (Losses)

Foreign currency gains or losses are primarily related to the financial assets remaining in South Africa. Foreign currency gains during the first six months of fiscal 2007 were $95,000. $10,000 of the gains related to the remaining assets from the sale of discontinued South African operations. Empire realized foreign currency gains of $132,000 and Strategy First realized foreign currency losses of $47,000. The foreign currency gains during the first six months of fiscal 2006 were $18,000. Foreign currency gains of $44,000 were related to the remaining assets from the sale of discontinued South African operations. Strategy First recognized $2,000 in gains and $28,000 in losses were recognized by the parent company.

Amortization of Convertible Debt Discounts and Issuance Costs

Amortization of convertible debt discounts and issuance costs were $331,000 in the first two quarters of fiscal 2007 as compared to $123,000 in the comparable period last year. In fiscal 2006 we recorded two months amortization as compared to six months in the Fiscal 2007.

Interest Income

Interest income of $313,000 was recorded during the six months ended December 31, 2007 as compared to interest income of $189,000 in the prior year’s comparable period. The increase of $54,000 is primarily the result of the Company’s increase in the average cash balances held during the six months ended December 31, 2006 as compared to December 31, 2005.

Interest Expense

Interest expense of $361,000 was recorded during the first two quarters of fiscal 2007 as compared to $95,000 in the same period of the prior year. Empire Interactive incurred interest expenses of $126,000 for the six months ended December 31, 2006. Interest expense also increased as a result of significant increases in debt obligations that occurred during the six months ended December 31, 2006 as compared to the comparable period of last year.

Discontinued Operations

During the first six months of fiscal 2006, we recognized gains of $357,000 from the discontinued operations of Fantasy Sports, Inc. On April 7, 2006, the Company sold all the assets and certain liabilities of Fantasy Sports, Inc. to FUN Technologies, LLC for approximately $4.4 million, including $3.85 million paid in cash at closing.

Net Loss

We have recognized a net loss of $2,188,000 during the first two quarters of fiscal 2007 compared to a net loss of $503,00 during the same period in the prior fiscal year. Operating earnings (loss) before Interest Depreciation and Amortization (“EBITDA”) was ($1,253,000) for the first two quarters of 2007 as compared to ($594,000) in fiscal 2006.

Financial Condition, Liquidity and Capital Resources

Cash decreased by $5,530,000 from $12,009,000 at June 30, 2006 to $6,480,000 at December 31, 2006.

The cash balances are being held for acquisitions and working capital purposes. Included in this amount is $3,758,000 which is classified as restricted cash. This amount relates to cash used to secure borrowings of our subsidiary, Strategy First, as well as money retained in South Africa to satisfy any potential liability that may result from our tax dispute with the South African Revenue Service.

Working capital decreased by $20,533,000 from $9,575,000 at June 30, 2006 to a deficit of $10,958,000 at December 31, 2006. This decrease is primarily due to the result of the acquisition of Empire Interactive on December 1, 2006 which resulted in significant decreases to the cash balance and significant increases in current liabilities. The majority of these liabilities relate to the $5,248,00 note payable to the Empire Interactive shareholders, $4,276,000 in accounts payable at Empire Interactive, $6,027,000 in accrued expenses primarily royalties at Empire Interactive, Empire Bank Overdraft Facility of $2,173,000 and an increase in the current portion of our convertible secured debenture to $2,743,000

At December 31, 2006 we had borrowings of $2,968,000 which consisted of $2,173,000 in Empire’s Bank Overdraft Facility, $735,000 advances against the lines of credit, secured by the Company’s cash, and term loans of $60,000. Additionally, we have two outstanding debentures issued to DKR Oasis, with a combined face value of $5,000,000 net of repayments or costs incurred. We currently pay monthly interest on this amount at a rate of Prime plus 1.5%. Should there be no conversions of these debenture; principal payments will start on February 1, 2007 with the loan being amortized monthly through December 2008. we also have note obligations to Empire shareholders of $5,248,000 which accrue interest at an annual rate of 4% and are payable in full on October 31, 2007. Additionally, there is an earn-out payable to former Empire shareholders. The earn-out is based on a formula of Empire’s EBITDA for the fiscal year ended June 30, 2007. The maximum amounts under the earn out formula could reach $12,100,000 and would be due to former Empire shareholders on April 30, 2008.

We currently do not have sufficient cash on hand to meet our short and long term obligations. In order to meet these obligations, we will need to raise additional capital through the sale of equity or additional debt. There is however no guarantee that we will be successful in this regard.

In the future we intend to add additional operating subsidiaries that will produce revenues and net profits. We may utilize a portion of the working capital in connection with the acquisition or establishment of those operations. We may also be required to secure additional debt or equity funding in connection with those future acquisitions. However, there is no assurance that we will be able to secure additional indebtedness or raise additional equity to finance future acquisitions on terms acceptable to management.

We currently do not have sufficient cash on hand to meet our short and long term obligations. While in the past, the Company has succeeded in meeting its cash flow requirements through the raising of additional debt or equity, the sale of assets or through operating cash flow, there is no guarantee that it may be successful in doing so going forward. The Company’s failure to do so will raise substantial doubt as to it’s ability to continue as a going concern. Management’s plans to alleviate this uncertainty are as follows:

·	raise additional capital through the sale of equity or additional debt. To this end management has received various indications of interest from investors to raise additional capital either through subordinated debt, preferred stock or a placement of common stock.

·	The Company has approximately $2.6 million restricted cash in South Africa set aside to match its current South African tax assessment. The Company is vigorously seeking to set this assessment aside and if it does so these resources will be available for general corporate purposes.

·	In the event the Company is unsuccessful in any of the above measure, it may seek to renegotiate some of the terms of its larger short term liabilities, primarily related to the acquisition of Empire Interactive and its outstanding convertible debentures

Critical Accounting Policies

The following is a discussion of the accounting policies that we believe are critical to our operations:

Revenue Recognition

Empire Interactive and Strategy First distribute the majority of their products through third-party software distributors to mass-merchant and major retailers and directly to certain entertainment software retailers, all of which have traditionally sold consumer entertainment software products. Additionally, the companies may license their products to distributors in exchange for royalty payments. The distribution of products is governed by purchase orders, distribution agreements or direct sale agreements, most of which allow for product returns and price markdowns. For product shipments to these software distributors or retailers, the companies record a provision for product returns and price markdowns as a reduction of gross sales at the time the product passes to these distributors or retailers.

The provision for anticipated product returns and price markdowns is primarily based upon the company’s analysis of historical product return and price markdown results. Should product sell-through results at retail store locations fall significantly below anticipated levels the adequacy of this allowance may be insufficient. The companies review the adequacy of its allowance for product returns and price markdowns and if necessary make adjustments.

In the case of royalty income, the companies record this income when earned based on sales reports from its distributors. In many cases, the companies receive guaranteed royalty income and these revenues are recorded upon signing of the royalty agreements. These amounts are carried as accounts receivable until paid.

Development Costs

In the past, Empire Interactive has incurred significant software development expenses in connection with the production of their products. Under SFAS No. 86 an analysis needs to be conducted as to when commercial feasibility of a product is reached, thereafter development expenses are amortized. There are differing industry determinations in regard to commercial viability of an interactive entertainment software product. Historically, Empire’s management has taken the position that commercial feasibility is reached very late in the development process and therefore has not amortized any development costs in regard to their products. The Company is currently evaluating the appropriateness of this position and will make its own determination in this regard once it has completed its analysis.

Goodwill Valuation

Goodwill represents the excess of the purchase price over the fair market value of net assets acquired. The process of determining goodwill requires judgment. Evaluating goodwill for impairment involves the determination of the fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and our strategic plans with regard to our operations. To the extent additional information arises or our strategies change, it is possible that our conclusion regarding goodwill impairment could change, which could have a material effect on our financial position and results of operations. For those reasons, we believe that the accounting estimate related to goodwill impairment is a critical accounting estimate.

The Company reviews goodwill annually (or more frequently under certain conditions) for impairment in accordance with SFAS No. 142, goodwill and other intangible assets. The Company performed its annual impairment test of goodwill as of June 30, 2006 and determined that goodwill was not impaired. While the Company believes that no impairment existed as of December 31, 2006, there can be no assurances that future economic or financial developments might not lead to an impairment of goodwill.

Intangible Assets

Intangible assets include software game titles and non-competition agreements. Intangible assets, excluding goodwill, are stated on the basis of cost and are amortized on a straight-line basis over estimated lives of three to ten years. Intangible assets with indefinite lives are not amortized but are evaluated for impairment annually unless circumstances dictate otherwise. Management periodically reviews intangible assets for impairment based on an assessment of undiscounted future cash flows, which are compared to the carrying value of the intangible assets. Should these cash flows not equal or exceed the carrying value of the intangible, a discounted cash flow model is used to determine the extent of any impairment charge required.

Forward-Looking Information

We make numerous forward-looking statements throughout this report including statements with respect to our expected income, acquisitions and other growth opportunities, performance of investments that we have made, and operating expenses. Frequently these statements are introduced with words such as “expect,” “likely,” “will,” “believe,” “estimate,” “project,” “anticipate,” or “predict.” Actual results may differ materially from those suggested by the forward-looking statements that we make for a number of reasons including those described in Part II, Item 1A, “Risk Factors” of our report on Form 10-K for the year ended June 30, 2006.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not ordinarily hold market risk sensitive instruments for trading purposes. The Company does however recognize market risk from interest rate and foreign currency exchange exposure.

Interest Rate Risk

On December 31, 2006, our cash resources earned interest at variable rates. Accordingly, the Company’s return on these funds is affected by fluctuations in interest rates. The Company also has significant debt that is tied to interest rates and, therefore, any increase in interest rates will have a negative effect on the Company’s interest payments. At December 31, 2006, the Company had two convertible notes outstanding with a combined balance of $5 million. The interest on these convertible notes is based on a floating rate equal to prime plus 1.5%. A hypothetical 100 basis point change in interest rates would result in an approximate $50,000 change in annual interest expense.

In addition to the convertible debentures the Company had a secured line of credit facility at December 31, 2006 .Based on the December 31, 2006 Balance on this facility a hypothetical 100 basis point change in interest rates would result in an approximate $7,400 change in annual interest expense.

Foreign Currency Risk

Empire Interactive, PLC is incorporated in the United Kingdom. Empire sells products throughout the world. Its functional currency is the Pound Sterling. This has exposed it to market risk with respect to fluctuations in the relative value of the major currencies particularly the Euro, British Pound, and the US dollar.

Strategy First, Inc. is incorporated in Canada and sells products throughout the United States and Europe. Its functional currency is the Canadian Dollar. This has exposed the Company to market risk with respect to fluctuations in the relative value of the Euro, British Pound, the Canadian dollar, and the US dollar.

Certain of the Company’s cash balances and the remaining proceeds from the sale of its South African subsidiaries are denominated in South African Rand. This has exposed the Company to market risk with respect to fluctuations in the relative value of the South African Rand against the US dollar.

On March 9, 2005, the Company acquired a twelve-month Rand put/US dollar call option, at a strike price of R6.25 to the US dollar. During its term, this option served as a partial protection against the depreciation of the SA Rand versus the US dollar. The cost of the option was approximately $200,000 and it was closed out in March 2006. The Company currently does not hedge its South African Rand exposure.

At December 31, 2006, we had assets denominated in South African Rand of R 35.2 million ($ 5.0 million).

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure (1) that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's ("SEC") rules and forms, and (2) that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Prior to the filing date of this quarterly report, under the supervision and review of our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

In addition, there have been no significant changes in our internal controls and procedures or in other factors that could significantly affect those controls since our evaluation. We cannot assure you, however, that our system of disclosure controls and procedures will always achieve its stated goals under all future conditions, no matter how remote.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Other than as set forth below we are not currently a party to any material legal proceedings. We may become from time to time involved in legal proceedings in the ordinary course of business. We may not be successful in defending these or other claims. Regardless of the outcome, litigation can result in substantial expense and could divert the efforts of our management.

In April 2006, our First South African subsidiary received a letter from the South African Revenue Service (“SARS”) challenging certain tax treatment of dividends and operating loss carry forwards for the years 2002 through 2004. Subsequently SARS issued a tax assessment for approximately $3.0 million. The Company believes that its South African tax filings are in full compliance with all applicable laws and is vigorously defending its position in this regard. However, until such time as these issues are resolved, the Company will retain cash in an amount approximately equal to the assessment in South Africa to satisfy any potential liability that may arise. The Company has recorded an estimated liability of $618,000 in this regard but may be forced to increase this amount should it receive adverse information as it continues its appeal of the SARS assessment.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors disclosed in Part I, Item 1 of the Company’s Annual Report on Form 10-K for the year ended June 30, 2006 apart from the following:

If we are unsuccessful in raising additional capital in the future, we may not be able to continue to operate or grow our business.

The acquisition of Empire Interactive on December 4, 2006 has resulted in the Company assuming significant short term liabilities related both to payments owed under the terms of the acquisition agreement as well as to the operations of Empire. The Company currently does not have adequate cash resources to meet these obligations. Management’s plans to alleviate this uncertainty are discussed in MD&A under the “Financial Condition, Liquidity and Capital Resources” caption and Note 2 to the unaudited condensed consolidated financial statements. Management believes that the actions that will be taken by the Company provide the opportunity for the Company to improve liquidity and achieve profitability. However, there can be no assurance that such events will occur. Should the Company fail in its efforts as detailed in the MD&A this will raise substantial doubt as to its ability to continue as a going concern.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit Number	Description

3.1	Memorandum of Association of the Registrant(2)

3.2	Bye-Laws of the Registrant(2)

4.3	Registration Rights Agreement, dated October 19, 2006, between the Registrant and the purchaser named therein(4)

10.1	Securities Purchase Agreement, dated as of October 19, 2006 among the Registrant ands each purchaser identified on the signature pages hereto (4)

31.1	Certificate Pursuant to Section 302 of the Sarbanes Oxley Act of 2002(3)

32.1	Certification Pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(3)

___________

(1)

Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (No. 33-99180) filed on November 9, 1995, as amended on Form S-1/A No. 1, Form S-1/A No. 2, Form S-1/A No. 3 filed on December 27, 1995, January 16, 1996 and January 24, 1996, respectively and Form 10-Q for the fiscal quarter ended March 31, 2000.

(2)	Incorporated by reference to the Registrant’s Current Report on Form 8-K filed October 24, 2006.

(3)	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized.

Date: February 20, 2007

SILVERSTAR HOLDINGS, LTD.

/s/ Clive Kabatznik

Clive Kabatznik

Chief Executive Officer

Chief Financial Officer

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Litigious
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Silverstar (SSTRF) Inactive 10-Q2007 Q2 Quarterly report

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